Hunting bounty.

SENATOR Charles Grassley (R., Iowa), a slow-talking farmer who has made bales of political hay out of his rural Midwestern heritage, likes to portray himself as a prairie watchdog against government fraud and waste. Since early in his career in Congress he has gotten big political mileage out of his attacks on procurement follies at the Department of Defense. Who can forget the $7,600 Air Force coffee pot he immortalized, or the $1,868 Pentagon toilet seat?

Yet Senator Grassley's efforts to eliminate waste and fraud have produced decidedly mixed results. His blasts led to no congressional investigations. Nor has he helped pass any substantial reforms of the procurement process. What the prairie watchdog did do in 1986 was to help create a new class of plaintiffs in a society already awash in unnecessary litigation, providing employment for a new class of trial attorneys.

These lawyers represent informers and whistleblowers who, in exchange for bounties, expose fraud in government procurement. These lawyers got their big chance after Senator Grassley played a leading role in resurrecting the False Claims Act, a Civil War - era law that allows informers who have found fraud in the government to bring qui tam suits, a Latin term first used in Britain to mean one who sues on behalf of the king as well as of himself. It allows informers who expose fraud to become, in effect, private attorneys general.

Senator Grassley's revived False Claims Act gets both high and low marks for its performance since 1986. It has improved the ability of the Department of Justice to prosecute fraud, with or without a whistleblower, primarily by lowering the burden of proof. However, the qui tam whistleblower provisions have fostered a pattern of fraud and abuse of whistleblowers by attorneys who have grown rich off their clients by taking a huge cut of the bounty.

Original Abuse

THE original False Claims Act didn't work as advertised. Often suits were found to be parasitic, based on information already known to civil and criminal investigators. When the Supreme Court in 1943 (Marcus v. Hess) allowed a qui tam action brought by a person who simply copied a criminal indictment prepared by the government, Congress amended the law to bar any suit based on information the government already possessed. As a result, the False Claims Act fell dormant for forty years.

In 1986, Senator Grassley and Representative Howard Berman (D., Calif.) sponsored a revival of the Act, with various amendments. Most of these amendments were not new -- they had been kicking around for several years, advocated by various nonprofit and liberal organizations that wanted to curtail fraud in defense procurement. The idea of reviving the Act got a big boost from a famous whistleblower -- Ernie Fitzgerald, a Pentagon official who criticized waste on the C5A transport plane in congressional testimony in 1968.

Beyond these public-spirited voices were attorneys who saw an opportunity to make big bucks. The most important of these was John R. Phillips, a liberal Democrat, and an attorney in Los Angeles. Congressman Berman was a friend of Phillips; Senator Grassley's embrace of him is harder to understand.

One of the key provisions Phillips sought, and got, in the 1986 amendments was an increase in the portion of the recovery an informer can claim, from 10 per cent to a range between 15 and 30 per cent. Another provision allowed those who participated in a fraud to bring a qui tam suit. These amendments, Phillips claims, along with an increase in the award to the government from double to triple damages, provided the financial incentives that would make the act work. To be sure that whistleblowers did not end up giving all their bounty to attorneys, the act included a provision for statutory attorney fees awarded to the plaintiff to reimburse his attorney.

The revived False Claims Act has led to a flood of mostly minor suits. Between 1986 and 1993 there were about 335 qui tam suits, which yielded a total recovery of $8.6 million, for an average of $39,000, according to a report prepared for the last Congress by Assistant Attorney General Frank Hunger. On the other hand, eighty qui tam suits that the government joined as co-plaintiff had led to $400 million in recoveries by the end of 1993, Hunger reported. During 1994 another $378 million in qui tam recoveries was added, according to the Justice Department, bringing the total amount to $787 million.

Grassley and other supporters of qui tam believe the $787 million proves that the False Claims Act is working. But even staunch supporters of the doctrine of qui tam do not dispute that the Justice Department would very likely have pursued many of the successful fraud cases without it.

Cui Bono?

PERHAPS the key error in Grassley's view is that he uncritically accepts the notion advanced by Phillips and others that qui tam is purely in the public interest. In fact, when bounty hunting becomes the chief motivating factor in uncovering fraud, the public interest takes a back seat to personal financial gain. For example, since those participating in a fraud can now bring qui tam suits, it is in their interest to prolong the fraud as long as possible before blowing the whistle. They can thus earn an even bigger bounty.

In one of the biggest qui tam cases so far, involving informer Chester Walsh against General Electric's aircraft division, Walsh was accused by the Justice Department of delaying his report of fraud for two years, thereby tripling the eventual loss to the government. To be sure, not all whistleblowers act purely for selfish gain. Some really are motivated by the good of the nation. And many whistleblowers not only lose their careers but never earn a bounty because they can't produce enough evidence to bring their case to a successful conclusion.

As for attorneys, however, most are attracted by the obvious lure of a handsome reward. Phillips has won big settlements in five major cases -- four defense cases involving General Electric, Singer, Litton, and Teledyne, plus a Medicare fraud case against National Medical Labs. A former client of Phillips, whistleblower Max Killingsworth, estimates that in this way Phillips has earned more than $40 million. Phillips scoffs at such numbers, but refuses to provide any hard information about how much he makes.

One of several new amendments sponsored in the last Congress by Grassley and Berman, and supported by Phillips, would further blur public and private interest. One provision they sponsored appeared to allow organizations to sue or to be co-plaintiffs with individual informers.

While this proposal may seem innocent, it is not. For-profit qui tam attorneys can use friendly or allied nonprofit organizations as co-plaintiffs to earn hidden contingency fees while being paid at their hourly rate under the statutory-fees provision. Indeed, some qui tam attorneys have directly asked their clients for contingency fees in addition to requiring that they turn over any statutory fees awarded by the courts. Thus, they get paid twice, which often means they recover more from their cases than their clients do.

Phillips's own earnings have been involved in a titanic struggle with Max Killingsworth, who was his client in qui tam suits against Teledyne and Northrop. Killingsworth has been particularly concerned about Phillips's relationship with a nonprofit organization named Taxpayers Against Fraud (TAF), which Phillips helped set up. For many years, in fact, when one telephoned the number listed for TAF, the phone rang at the Hall & Phillips law firm in Los Angeles. TAF is not a membership organization supported by contributions, and Phillips admits that he has selected TAF's board members, including, for a short time, Representative Henry Waxman (D., Calif.).

According to a former TAF director, Scott Armstrong, who resigned in early 1994, TAF board members are all long-time acquaintances of Phillips without expertise in qui tam litigation or issues of fraud in government procurement. When Armstrong presented cases to the board for their consideration, he says, they would not allow TAF to accept cases that Phillips opposed. Also, the board always supported TAF's involvement in cases handled by Phillips's law firm. Armstrong resigned from TAF when Phillips and the board refused to provide information on the firm's finances. Phillips insists that board members are independent.

Phillips's use of TAF as a co-plaintiff in qui tam lawsuits has been questioned by the Department of Justice, federal judges, defendants, and some of Phillips's own clients. Justice objected to the inclusion of TAF as a co-plaintiff in the big General Electric settlement by noting in a court motion filed in 1992 that TAF "brought nothing to this action except the desire to share in the bounty," while reducing the eventual recovery for the government and increasing the cost of litigation.

Phillips admits that TAF has had agreements with him to pay him a substantial portion of the bounty it receives; he has also required that clients turn over to him all statutory fees awarded to them by the court. Armstrong says that TAF's standard procedure is to turn over half the bounty award that it earns to Phillips's law firm. Sometimes Phillips gets more than half of TAF's share.

Take, for example, the Chester Walsh case against General Electric. Court documents reveal that attorneys representing Walsh collected $5.34 million, divided as follows: $2.29 million in statutory fees, $227,000 in costs, and 25 per cent of the total award of $11.3 million, or $2.825 million. Out of the total paid to all Walsh's attorneys, Hall & Phillips received $4.08 million as its portion. Because TAF got 50 per cent of the $11.3 million-bounty, Walsh's share was $5.65 million, an amount only slightly higher than the $5.34 million he paid the lawyers who represented him. Judge Carl B. Rubin of the U.S. District Court of the Southern District of Ohio found the combined total compensation of statutory fees and a contingency fee for Phillips "extraordinarily high." Noting, however, that the Supreme Court had in Venegas v. Mitchell (1990) found "no fault" in the fact that attorneys received both court-awarded fees and a contingency fee, a troubled Judge Rubin, in December 1992, allowed the total award to the attorneys to stand.

Justice appealed and, in November 1994, scored a big victory when three judges on the 6th Circuit sharply rebuked Judge Rubin for his decision; it vacated the $2.35-million award for attorneys' fees (including $1.8 million for Phillips's law firm), and asked the lower court to re-examine the question of statutory fees. The court also questioned whether the division of the bounty and legal fees was reasonable. Judge Danny J. Boggs also ordered the lower court to determine if Hall & Phillips's relationship with TAF violated ethical canons, particularly Rule 1.8(j) of Model Rules of Professional Conduct, which prohibits a lawyer from acquiring a proprietary interest in the subject matter of litigation. "If TAF is in fact a front for Hall & Phillips as well as a co-plaintiff in the case, then the ethical mandates of Rule 1.8(j) have been implicated," Judge Boggs wrote. He gave Judge Rubin broad powers to alter the final fee paid to Phillips, and stated that should TAF be denied standing as a plaintiff, the lower court could modify the division of the bounty among the parties.

In Killingsworth's own case, he claimed in a suit filed in California in 1993 that neither TAF nor Phillips had told him that Hall & Phillips would receive a contingency share of TAF's recovery in the case against Teledyne Industries. Killingsworth says Phillips persuaded him to share his recovery 50 - 50 with TAF, while assuring him that Phillips's only pay was to be the statutory attorney fees. Phillips says this charge is "absolutely false" and claims Killingsworth is "confused" about what was originally said.

According to Killingsworth's current attorney, Phil Benson, Phillips had a secret arrangement with TAF to take about 70 per cent of TAF's half of the bounty in qui tam suits against Teledyne and Northrop. Phillips's potential pay would, thus, include 35 per cent of the total bounty plus 100 per cent of statutory fees awarded to Killingsworth and TAF. Phillips does not deny these arrangements.

Apart from the money problem, the use of organizations like Taxpayers Against Fraud as co-plaintiffs in qui tam cases is troubling because it appears designed to confuse juries, leading them to believe that the action is solely in the public interest, and to conceal the motive of private gain. Also, a nonprofit co-plaintiff friendly to the qui tam attorney is useful in getting informers to give up part of their claim, in the belief that the money is going to support a nonprofit, charitable organization.

Protection against Favors?

DEFENDERS of the False Claims Act argue that there are enough cases of foot-dragging in the face of urgent whistleblowing to justify qui tam lawsuits as a needed backup. "The king's business is still handing out boodle," says Ernie Fitzgerald, referring to the Federal Government. Nobody in power, he adds, including the Justice Department, wants to jeopardize the ability of politicians in the Executive Branch and in Congress to hand out favors.

While Fitzgerald's jaundiced view of Washington may be colored by his own experience, it is reinforced by Justice's recent abandonment of a qui tam case involving citrus growers in California and Arizona. On August 31, 1994, Justice asked the U.S. District Court for the Eastern District of California to dismiss 33 cases of alleged fraud brought in 1988 and 1989 by Sequoia Orange Company, an independent handler, against affiliates of the Sunkist Growers, Inc., an alliance of growers, packers, and marketers who dominate the California orange and lemon industry. Sequoia claimed that growers and packers who are affiliates of Sunkist had repeatedly violated U.S. Department of Agriculture (USDA) marketing orders establishing quotas for Valencia and navel oranges and lemons. Sequoia charged that Sunkist had benefited financially from those violations, to Sequoia's detriment, creating artificial shortages and higher prices for consumers. Justice had joined Sequoia as a co-plaintiff.

Justice's turnabout came shortly after Senator Dianne Feinstein (D., Calif.) made a second appeal to Assistant Attorney General Hunger to abandon the cases. (An earlier request in May had not moved Justice to change its position.) Senator Feinstein had already convinced the USDA to abandon support of the Sequoia cases.

Senator Feinstein, who declined to comment on this issue despite several requests, held a number of conversations on the cases with Deputy Agriculture Secretary Richard Rominger early in 1994, according to correspondence between the senator and Rominger. Rominger said last year the decision to support dismissal of the Sequoia cases was made to bring "peace" to the industry and to end excessive litigation over marketing orders. Justice echoed the USDA, claiming that it sought "to restore order and fairness to the citrus industry." But James A. Moody, a Washington-based qui tam attorney, sees it differently. He says the change of heart at both departments came in response to pressure from Sunkist and Dianne Feinstein.

What is Senator Feinstein's interest in the case? Last November a non-profit free-market organization called Farmers Alliance for Improved Regulation (FAIR) filed a complaint against Senator Feinstein with the Senate Select Committee on Ethics, claiming that she had improperly intervened to urge dismissal of a meritorious case. FAIR charged that her decision was influenced by at least $15,000 in campaign contributions from Sunkist between 1992 and early 1994, and that she and her husband, Richard Blum, had direct financial ties to a partnership (Newhall Land and Farming) that is affiliated with Sunkist Growers. After a Los Angeles Times reporter queried Senator Feinstein on the tie to Sunkist, she said that she and her husband no longer owned an interest in Newhall, yet she has provided no details to support her claim.

Sequoia won an important victory in this case March 3 when Judge Oliver W. Wanger of the U.S. District Court for Eastern California denied Justice's motion to dismiss the cases and ordered an evidentiary hearing June 20 to determine whether Justice acted arbitrarily in seeking dismissal.

Moody's experience as a qui tam lawyer has convinced him that the False Claims Act is "a great tool to pry loose those categories of cases that may not be prosecuted" because of political influence or because they are difficult to prosecute and may not lead to easy success. "There's a tendency [at Justice] to prosecute the small cases and let the big fry get by," Moody says, which occurs because of "the human tendency to build a score card." The law has worked to deter fraud, Moody claims, inducing federal contractors to oversee their own operations more carefully in order to ferret out fraud and waste.

Max Killingsworth's battle with Justice over the Northrop case involving the MX missile is another instance of Justice dragging its feet. When Killingsworth first brought the matter to the attention of the government in 1988, Justice declined to join him as a co-plaintiff, claiming there was insufficient evidence of a significant loss. Killingsworth pooh-poohs that explanation and says he had documents indicating fraud of $63 million. He claims that Assistant U.S. Attorney "Howard [Daniels] told me that the reason he didn't intervene in the Northrop case was that Northrop and the Air Force were in collusion to hide the costs of the inertial guidance system for the MX missile from Congress." (Daniels declined to comment.)

Killingsworth persevered in his case against Northrop until he was vindicated when, in July 1994, Justice reversed its position and offered to join as a co-plaintiff. Justice claims its change of heart came because Killingsworth finally had sufficient evidence of considerable fraud, estimated to total $111 million. In fact, Justice was dragged into the case again after Judge Terry Hatter of the U.S. District Court for the Central District of California asked the department to approve a $4.2-million settlement Killingsworth had worked out with Northrop. Justice refused because Killingsworth got $2.7 million while the government got only $1.5 million. When the court approved the settlement over Justice's objections, and it was upheld by the circuit court, Justice made a surprise offer to join Killingsworth and pursue the suit if Killingsworth abandoned his settlement. Killingsworth accepted the offer. Judge Hatter ignored this turn of events and reinstated the $4.2-million settlement. Justice is appealing that decision.

Mandate to Congress

CONGRESS should hold oversight hearings on all the controversies that have plagued the False Claims Act, and it needs to hear from people outside the Beltway, including whistleblowers and government contractors. If Congress does investigate, it should consider new amendments that more carefully separate public from private interest. It should view with suspicion any claims that litigatory greed is always good. And it should take immediate steps to end fraudulent abuse of the False Claims Act.

Specifically, attorneys should be prohibited from earning both statutory fees and contingency fees. Contingency fees should be reduced when the defendant makes an early offer to settle the case. Also, attorneys should be prohibited from taking a proprietary interest in the bounty offered to whistleblowers, either directly or indirectly through affiliated organizations. And, finally, nonprofit organizations should not be allowed to sue as co-plaintiffs.

Congress should conduct periodic oversight of important cases that Justice refuses to pursue. Maybe then the revived False Claims Act can fulfill its promise and Senator Grassley can have something to crow about.